Reports

A new scenario tool applied to Latin America

In this paper we introduce a new scenario framework for public debt sustainability which explicitly models the structure of debt. The debt structure can be as important as the debt level for sovereign credit risks as it determines how vulnerable public balance sheets are to adverse shocks such as higher interest rates, currency fluctuations and/or capital flow reversals.

Growth in the largest emerging economies – led by Brazil, China and India – is being supported by rapid expansion of domestic and international financial markets. This report reviews a dozen such markets.

Nominal GDP in emerging economies almost doubled, rising 97% between 2005 and 2010. The rate of growth in most financial markets in emerging economies exceeded growth in GDP during this period (Chart 1). Those markets to have roughly doubled in size include domestic bonds, insurance premiums and external borrowing from international banks. Other markets to have risen about threefold were bank assets, marine insurance premiums, mutual funds and equity market capitalisation; while contracts traded on derivatives exchanges have increased fivefold. Amongst the main markets, only pension assets and international bonds have grown more slowly than GDP: pension assets up by a third and international bonds up by over three quarters.

Mega Plaza looks and feels much like any shopping mall, anywhere. Hidden speakers pipe The Girl from Ipanema. Posters ply car payment instalment plans. There is a Cineplex, a busy gym and a local fast food outlet that retails a “Kobe Steak” burger.

What is unusual, though, is Mega Plaza’s location: on a dusty stretch of the Pan-American highway, a few miles north of Lima’s historic centre.

Only 20 years ago, the “northern cone” suburb, in which Mega Plaza squats, was a collection of vegetable plots and makeshift hovels – home to hardscrabble rural settlers seeking refuge from a dirty war between the army and Maoist guerrillas that eventually claimed 70,000 lives. Now more than 2m people live there – about a quarter of the capital’s population.

Short-term drivers, trends and implications

The current surge in food prices is due to the superposition of short-term drivers and a structurally tight supply-demand balance. Short-term food price fluctuations have been largely related to supply-side factors. Over the long-term, rising global demand is exerting significant upward pressure (in a context of supply constraints). It is driven by strong income growth in emerging market economies – also by population growth and increased demand for biofuels.

Food price increases are likely to remain an important driver of headline inflation in emerging market economies, where consumers spend over 50% of their income on food. Pass-through from commodity prices to consumer prices is particularly low in the OECD where more processed food is consumed. Read more